Visit the mergers and acquisitions (M&A) section of just about any consulting firm or any MBA school’s website and you’ll find research-backed assertions indicating that “…50% to 80% of M&A transactions fail to deliver shareholder value.”1 The authors of these studies have identified two factors causing M&A transactions to fall short of delivering their potential value: lack of proper planning, either before committing or during pre-close, and the failure to address cultural issues.
To illustrate this point, for a large M&A transaction that resulted in a company with sales over US$50bn and more than 100,000 employees, a value capture (VC) team of nine full-time people drove the target-setting, planning, and monitoring of all synergy capture for approximately a year, including eight months pre-close and four months post-close. The companies did everything as well as they could:
- Planning started well in advance of close date.
- The best talent was brought to the table, including top employees from each company – as many as 500 people.
- Expert consultants from the top consulting firms were hired to support the planning process.
- Senior management dedicated significant attention to the transaction.
- The new organisation was promptly announced.
- Internal and external communications about the merger were excellent.
The merger was considered a success because the company over-delivered on its synergy commitment to Wall Street by more than 40%, and many articles were subsequently published in the press about the transaction’s well-planned execution. However, when compared against potential, the merger fell short. It should have delivered at least 80% over Street commitment in a compressed timeframe. Additionally, it should have delivered significant revenue.
The reason why the merger fell short of its potential lies in the supporting technology. A planning force of 500 employees, an army of consultants, and the well-staffed VC team, all armed with Excel, simply did not have enough agility and analytic capabilities to deliver the best plans. They couldn’t quantify or understand the true impact of synergy ideas on the organisation, let alone evaluate all the combinations of cost-cutting ideas and investments that would result in the best, most flexible plan.
Poor Results – Driven by the Limitations of Today’s M&A Approach
Planning starts with the merger integration office (MIO), which establishes the overall structure of the merger planning effort, including assigning planning teams (PT). This initial step is guided by the organisational structure announced by the executive leadership (EL).
The VC team creates cost, personnel, and profit and loss (P&L) baselines for the entire company as well as for each planning team, as defined by the MIO. The VC team works with the MIO and the EL to establish P&L, cost, and headcount reduction targets for each planning team (P&L targets are given only to some teams).
Once teams and targets have been established, pre-close planning focuses primarily on building the strategic and tactical integration plans that would maximise the company’s competitive position and synergy capture after close. Every week each team must report the latest synergy plans and corresponding financials to the VC team, which provides a holistic picture to the integration office and the executive leadership teams. The VC team is responsible for ensuring plans and financials are properly integrated across teams.
While the approach makes sense given the timing and tools available to companies and their consultants, it leaves significant potential on the table. Not only are strategies informed by limited or often incorrect insights, but as much as half of the potential synergies are missed. Here’s why:
- Synergy and headcount targets are not aligned with opportunity, forcing outcomes below potential. Targets are assigned based on financial and headcount baselines created by the VC team and adjusted by the MIO and EL. Targets ignore true potential because opportunities and constraints are not properly quantified.
- Planning teams act in silos, producing sub-optimal and often infeasible plans. In a typical merger, various organisational teams evaluate the best plan within their silo, and have no time or ability to coordinate with other teams to understand the enterprise-wide impact and feasibility of their plans. The reality is that each team’s plans affect the impact of other plans, and the inability to evaluate cross-company plans significantly reduces the potential. Additionally, constraints are often unaccounted for, resulting in delays and/or infeasibilities that cost the company additional resources and precious time.
- VC acts primarily as a process watchdog and is unable to drive cross-team strategies and insights. The VC team spends most of its time every week integrating dozens of spreadsheets with synergy and headcount reduction input from each team. Furthermore, the VC team is unable to drive cross-functional insights because its baselines and data provided by others teams is only at the financial and headcount levels. The lack of operational and KPI (key performance indicators) information means that the VC team does not understand how decisions by the PT impacts other teams.
- Poor linkage to execution. While each team has a realistic view of execution feasibilities within its own silo, PTs cannot plan feasibilities that take into account the plans of other teams. For example, a business unit might evaluate increasing production of a certain product, but it does not know that the supply chain team is planning on increasing synergies by reducing resources used to produce the product. This results in either lost synergies or infeasible strategies. In addition, the post-merger integration effort is delayed.
The Advanced M&A Approach – Integrated Business Planning
Companies and consultants should move towards a more comprehensive methodology that maximises synergy capture and enables merging companies to quickly attain a stronger competitive position. With integrated business planning (IBP), companies and consultants create enterprise-wide, optimised and aligned integration plans. The benefits of moving to this approach include:
- A clear understanding of the merger opportunity, including investment requirements, feasibilities, and timing. This provides the most robust valuation for the target company, and it enables the EL to establish maximum yet achievable synergy targets during pre-close planning.
- P&L, cost and headcount baselines move beyond financials to include operational metrics and KPIs for a more accurate and insightful view of owned, allocated and influenced revenues and costs. This allows the MIO and VC team to establish the appropriate PT structure and to allocate synergy targets to each that are aligned with the opportunity.
- One enterprise-wide model of all merger synergies, including financials, operations and constraints. This model delivers:
- Accurate financial, headcount, and operational impact from synergy ideas on the entire enterprise.
- Evaluation of multiple, interdependent ideas to find the combination with the best impact.
- Fast assessment of cross-functional strategies.
- Direct link between integration planning and execution, resulting in faster implementation and a dramatic reduction of unpleasant surprises.
Source: River Logic
The IBP approach typically yields at least 50% higher synergy capture at a much faster pace than current approaches.
Case Study – Valuation Scenario with a Top-tier Management Consulting Firm
- Two large manufacturing companies announce merger.
- Combined network of dozens of facilities (including plants and distribution centres) and assets (e.g. raw material sources) spread across multiple regions.
- Announced synergies relatively modest.
- Consultant partner approaches IBP vendor to model merger opportunities.
- Enterprise model built in a week, encompassing all business units and supply chain assets.
- Data obtained from a data-provider partner.
- Joint brainstorming and structuring of profit improvement and asset reduction opportunities with consultant partner.
- Significant profit improvement identified, more than tripling shareholder value commitment and doubling internal targets.
- Asset reduction opportunities could yield an additional US$500m in cash without hurting profits within 18 months.
- New insights on how to structure the merger to drive maximum capture of opportunities.
Consultants, academia, and industry experts correctly point out that most mergers destroy value today. The main reason is inadequate or improper planning which points to the wrong strategies and synergies. The IBP approach is a new methodology available today that delivers stronger and faster synergy capture. When properly implemented, companies can see more adequate company valuations, as well as a significant increase in the number of mergers that deliver positive returns to shareholders.
1 “Why do so many mergers fail?” Knowledge@Wharton, March 30th, 2005, p 1.
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